Court: Superior County: Los Angeles Judge: James C. Chalfant Ct. App. 2/3 B218347 Super. Ct. No. BS116375
The opinion of the court was delivered by: Cantil-sakauye, C. J.
By statute, counties are responsible for the administration of local property taxes by assessing and collecting them and then disbursing the revenue to the various cities, special districts, schools, and other entities within the county. Some of the revenue, however, must be allocated to each county's Educational Revenue Augmentation Fund (sometimes referred to as ERAF) -- a state-created fund that reallocates portions of local property tax revenue to fulfill the state's constitutional obligation to fund education at specified levels. In order to cover county costs in administering the property tax system, a county is statutorily authorized to impose a property tax administration fee on each city or other entity within its borders. The property tax administration fee is based on an apportionment of the amount of property tax revenue allocated to the city or other entity. But any revenues allocated from these cities and entities to the county's ERAF are exempt from this fee. At issue here is a dispute between Los Angeles County (County) and 47 cities (Cities) within the county regarding how County calculates and imposes property tax administration fees on Cities for their share of County's costs in administering the property tax system. In 2004, two different budgetary measures were enacted diverting local property tax revenue that would have been deposited into each county's ERAF to instead fund various state budget gaps, but the state otherwise made whole each county's ERAF contribution through the allocation of other state funds. A dispute arose after the enactment of these measures when County included in the calculations for the administration fees it imposed on Cities the tax revenue that had been earmarked for the County ERAF but was diverted by the 2004 budgetary measures.
County takes the position that these two budgetary measures allowed it to impose property tax administration fees on the diverted local property taxes because they no longer funded the County ERAF, but were instead used to fund state budget gaps and thus have lost their exempt status. The effect of County's position has allowed it to withhold from Cities an additional $4.8 million in fiscal year 2006-2007 and $5.3 million in fiscal year 2007-2008 in property tax administration fees. Cities, however, take the position that the ERAF exemption from the fee still applied under the 2004 legislation and that Revenue and Taxation Code section 97.75, enacted as part of the 2004 legislation, prohibited County's method of calculating the property tax administration fee. We agree with Cities' position, and we affirm the judgment of the Court of Appeal, which reached the same conclusion.
In 2008, Cities*fn1 petitioned the trial court for a writ of administrative mandate, under Code of Civil Procedure section 1085, challenging County's method of calculating the property tax administration fee and seeking a writ ordering County and its auditor-controller to reimburse Cities for the amount disputed in fiscal year 2006-2007. The parties agreed to try the matter by reference under Code of Civil Procedure section 638 and stipulated to most of the relevant facts. Following a trial, the referee ruled in mid-2009 that County's method of calculating the disputed fee was consistent with legislative intent and did not violate Revenue and Taxation Code section 97.75.*fn2 Cities appealed, and the Court of Appeal reversed, relying almost exclusively on the plain meaning of section 97.75 to conclude that County's method of calculation was unlawful. We granted County's petition for review.*fn3
II. Relevant Factual Background and Statutory Law A. The Effect of Proposition 13 on Property Tax Allocation and Administration
Counties are responsible for administering the property tax system by assessing, collecting, and allocating ad valorem property tax revenues from property owners within their borders. In general, the counties manage the property tax accounting system for the various local entities*fn4 within their jurisdiction and annually distribute to each entity its calculated share of property tax revenue.
Before voters passed Proposition 13 (Cal. Const., art. XIII A) in 1978, counties were permitted to set their local property tax rates at a level that fully financed their administrative costs in assessing, collecting, and allocating property taxes without charging local entities for these costs. When Proposition 13 capped property tax rates at 1 percent of assessed value, counties lost the flexibility of tailoring a dedicated funding source to fully cover their costs for this administration.
Following the passage of Proposition 13, the property tax allocation system has been governed by article 2 of chapter 6 of division 1 of the tax code, section 96 et seq., primarily sections 96.1, 96.2, and 96.5. Under these statutes, in every current fiscal year, each local entity receives property tax revenues equal to what it received in the prior year (also referred to as its base) (§ 96.1, subd. (a)(1)), plus its proportional share of any increase in revenues due to growth in assessed value within its boundaries, which is defined as the " 'annual tax increment' " (§ 96.1, subd. (a)(2); see §§ 96.2, 96.5). The sum of these two amounts -- the prior year base plus the current year's proportional share of the tax increment -- becomes each jurisdiction's new base amount for the following year's calculations. (§§ 96.1, subd. (a)(1), 96.5.) Named after the Assembly bill that originally enacted the fundamental structure of this statutory scheme, this system is commonly referred to as the "A.B. 8 allocation system," with section 96.1 as its principal statute. (City of Scotts Valley v. County of Santa Cruz (2011) 201 Cal.App.4th 1, 8-9, 49.) Under this statutory allocation system, "the proportional allocations established in the first fiscal year following the passage of Proposition 13, as modified for the following fiscal year, are perpetuated year after year, unless modified by the Legislature." (Id. at p. 9.)
The Legislature did not address the funding for property tax administration until 1990, when it enacted the first statute that allowed counties to bill cities for their proportionate share of the costs of property tax administration. (Former § 97, subd. (e), as amended by Stats. 1990, ch. 466, § 4, pp. 2043-2045; Arcadia Redevelopment Agency v. Ikemoto (1993) 16 Cal.App.4th 444.) As will be discussed in greater detail post, the Legislature subsequently amended this provision numerous times in the early 1990's. Relying on section 96.1 allocations as the basis of apportionment, section 95.3, as last amended in 1996 (Stats. 1996, ch. 1073, § 2, p. 7206), currently governs how a county annually apportions the costs of property tax administration among the local entities within its borders.
B. The Educational Revenue Augmentation Fund (ERAF)
In 1992 and 1993, the state was in the midst of a budget crisis, and in order to meet the state's minimum guaranteed education funding requirements under Proposition 98 (see Cal. Const., art. XVI, § 8, subd. (b)),*fn5 in 1992 the Legislature enacted legislation creating ERAF's in each county and shifted billions of dollars in property tax revenues from cities, counties, and other local entities into them. (Stats. 1992, ch. 700, § 4, p. 3120; County of Sonoma v. Commission on State Mandates (2000) 84 Cal.App.4th 1264, 1274-1275; County of Los Angeles v. Sasaki (1994) 23 Cal.App.4th 1442, 1452.) In 1993, the Legislature refined this legislation. (Stats. 1993, ch. 68, p. 939; Stats. 1993, ch. 566, p. 2812.) The 1992 legislation is popularly known as ERAF I; the 1993 legislation as ERAF II. The state then utilized the various ERAF's to offset contributions from the declining state General Fund in order to maintain its constitutional obligation under Proposition 98 to fund education.
The enactment of the ERAF's permanently modified the A.B. 8 allocation system by reducing the property tax base for each city and county by the amounts specified by the implementing statutes for ERAF I and ERAF II. (§§ 97.1, subds. (a)(1)-(2), 97.2, subds. (a)(1), (b)(1) & (c)(1), 97.3, subds. (a)-(c).) The permanent base shifts required by ERAF I and ERAF II became self-perpetuating for future fiscal years through the A.B. 8 process with each ERAF effectively becoming another entity receiving its share of local property tax revenues through the annual A.B. 8 allocation system.*fn6 (City of Scotts Valley v. County of Santa Cruz, supra, 201 Cal.App.4th at pp. 15-17.)
C. The Calculation of the Property Tax Administration Fee Under Section 95.3
Section 95.3 annually apportions the costs of property tax administration among the local entities within a county's borders. Under this statute, a county calculates an annual property tax administration fee*fn7 for each local entity, including cities, and that county's ERAF. This calculation is made in a manner that ensures each local entity bears a proportionate share of the county's total administrative costs based on the amount of property tax revenue allocated to each entity pursuant to section 96.1, the primary A.B. 8 allocation statute.
The annual calculation of the property tax administration fee for a city or local entity involves three steps. Pursuant to section 95.3, the county must first determine the local entity's "administrative cost apportionment factor." (§ 95.3, subd. (a).) For cities and that county's ERAF, this factor is a ratio derived by dividing the property tax revenue allocated to each local entity pursuant to section 96.1 by the total property tax revenue distributed within the county. The local entity's administrative cost apportionment factor is then multiplied by the county's total property tax administration costs from the prior year to calculate that entity's annual property tax administration fee. Finally, instead of billing the local entity for its property tax administration fee, the county simply withholds that entity's fee from the county's annual disbursement of local property tax revenue. (§ 95.3, subds. (a), (b).) Significantly, however, "those proportionate shares determined with respect to a school entity or ERAF" are exempt from any withholding to defray the county's administrative costs. (§ 95.3, subd. (b)(1).)
Because of the exemption for property tax revenues "determined with respect to a school entity or ERAF," (§ 95.3, subd. (b)(1)) counties do not recoup all of their annual costs of property tax administration and instead generally must absorb these unrecovered costs. As we will explain, over the years the Legislature has created several programs and has made various pronouncements concerning property tax administration, but has addressed the significance of this exemption for property tax revenues allocated to ERAF's only in one narrow circumstance.
III. The 2004 Budgetary Measures
In light of escalating property values in the early 2000's, property tax revenues appeared to be less volatile than other sources of tax revenue such as sales taxes and vehicle license fees. Accordingly, in 2004, the Legislature passed Senate Bill No. 1096 (2003-2004 Reg. Sess.) which contained two different budgetary measures that again tapped local property taxes to substitute for other revenue sources.*fn8
A. 2004 -- Proposition 57 and the "Triple Flip"
In 2004, the voters approved Proposition 57, the California Economic Recovery Bond Act, which allowed the state to sell up to $15 billion in bonds to close the state budget deficit. (Gov. Code, § 99050.) In order to create a dedicated revenue source to guarantee repayment of these bonds without raising taxes, the Legislature had passed already section 97.68, a temporary revenue measure that shifts revenue in a three-stage process known as the "Triple Flip." (Stats. 2003, 5th Ex. Sess. 2003-2004, ch. 2, § 4.1.) In the first "flip," 0.25 percent of local sales and use tax revenues are diverted to the state for bond repayment. (§§ 97.68, subd. (b)(2), 7203.1, 7204.) In the second "flip," the lost local sales and use tax revenues are replaced by property tax revenue that would have been placed in the county ERAF but are instead set aside in a Sales and Use Tax Compensation Fund established in each county's treasury. (§ 97.68, subds. (a), (c)(1)-(6).) In the final "flip," any shortfall to schools caused by the reduction of funds to the county ERAF is compensated out of the state's general fund. This so-called "Triple Flip" is slated to end once the Recovery Act bonds are repaid. (§§ 97.68, subd. (b)(l), 7203.1; Gov. Code, § 99006, subd. (b).)
B. The Vehicle License Fee (VLF) "Swap"
Also in 2004, the Legislature reduced the annual vehicle license fee (VLF) from 2 percent of a vehicle's market value to 0.65 percent of market value. (Stats. 2004, ch. 211, §§ 30-31, pp. 2332-2333; see also Guillen v. Schwarzenegger (2007) 147 Cal.App.4th 929, 937.) Because the VLF had been a significant source of local revenue, the Legislature passed section 97.70, also known as the "VLF Swap," which diverted property tax revenue to fully compensate each city and county for the VLF revenue that they otherwise would have received. This diverted property tax revenue, which otherwise would have been allocated to each county's ERAF, is placed in a Vehicle License Fee Property Tax Compensation Fund established in each county's treasury, and the county then distributes the fund to each city in lieu of the lost VLF revenue. (§ 97.70, subds. (a), (b).)
C. Revenue and Taxation Code Section 97.75 -- The ...